A fund of funds strategy captures all the benefits of private equity while lowering the risk through diversification across assets, geographies, sectors, managers, and vintages.
Equity markets can be divided into two groups, listed and private equity. The global market value of listed equity exceeds USD 100 trillion, whereas private equity is valued at around USD 6 trillion. Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies.
For companies, the advantage of private equity financing is the flexibility: they can easily access different forms of capital from their owners or other lenders at any given time without having to go through cumbersome public processes. As the owners are controlling shareholders, the governance model is very straightforward and proactive, especially when changes in market conditions or new opportunities demand swift action. Value creation in private equity becomes more tangible, and the time horizon for these actions is extended beyond individual quarters, albeit still restricted to 3 to 5 years.
Private equity outperforms public equities
The hands-on value creation is evident in the performance of the underlying assets owned by private equity investors, which in turn is reflected in the outperformance of private equity assets versus listed assets. Over the past ten years, private equity buyout funds have generated an IRR of 18.1 percent compared to 12.7 percent for public equities, an outperformance of 5.4 percent (Sources: MSCI Index and Preqin).
Evli's Private assets team. Starting left: Richard Wanamo, Nina Skogster, Ville Toivakainen, Roger Naylor, Emma Honkanen, Oskar Karlsson, Ben Wärn.
Investors get access to interesting companies and even sectors that are not present in listed markets through private equity. And eventually, some private equity-owned companies end up through IPOs on the listed markets, so investors are getting exposure ahead of the assets becoming listed.
Private equity assets are not immune to stock market volatility, as the listed markets are often used as a benchmark for valuations. Having said that, many other valuation metrics are used, particularly when assets are sold to strategic trade buyers. Also, when the listed market becomes volatile, private equity investors tend to stay on the sidelines, as there is no pressing need to transact assets at a time of uncertainty in the public markets. So, we would argue that private equity assets provide less volatility and, in the end, reflect more the true fundamental value of the assets at the exit.
Fund selection and risk mitigation play an essential role in private equity investments
Entering this asset class is not without its challenges. Direct investments in private equity funds may require minimum investments of EUR 10 million or more, and multiple funds are needed to mitigate unnecessary risks, such as high concentration in certain assets, sectors, or geographies. However, investing through fund of fund structures allow even smaller investor access to a diversified portfolio of assets.
Fund selection is also essential: the performance dispersion between strong and weak funds is significant, so deep market knowledge and a robust and proactive investment process are needed to access the best out of the thousands of private equity funds that will be fundraising at any given time.
Leveraging its scale, thorough investment process, integrated ESG evaluation, and dedicated fund selection expertise, Evli's global private equity investment strategy is designed to capture all the benefits of private equity while lowering risk through proper diversification across assets, geographies, sectors, managers, and vintages.
Our private equity fund of funds program has made more than 750 million in investment commitments and has a successful track record of more than 20 years of implementing this strategy and accessing best-in-class funds, offering our clients a practical way to build a solid cornerstone portfolio of attractive private equity assets.
NB! Evli's alternative investment funds are intended for professional investors and a limited number of non-professional clients who make an investment of at least EUR 100,000 and who are considered to have an adequate understanding of the fund and its investment activities.